How PayPal Almost Canceled Christmas

Internet darling Regretsy is a site and community built around poking fun at strange and weird offerings on the handmade goods site Etsy. Regretsy is also known for its charitable funding efforts, which have helped Etsy sellers in need and charities to the tune of over $100,000 since 2009.

This year, Regretsy launched a Secret Santa program by which needier members of its community applied to have Christmas gifts bought for their kids. The site management carefully vetted the applications and added over 200 kids to the Secret Santa list. The program raised enough money to not only cover the gifts but to send the families money. So far it sounds like the plot to a modernized Christmas movie, until PayPal stepped in as Scrooge.

Site owner April Winchell woke up one day to find out that all the money had been frozen because of her use of the Donate button. Fine, she said. I’ll sell all the toys on the site and send them to the needy families in question. PayPal said she couldn’t do that either, and spoke to her like she was a criminal trying to get around its policies.

For Regretsy and their Secret Santa families, all is now well. Regretsy’s post on the issue went viral and PayPal was swift to respond properly once it suffered the wrath of the Internet. All the funds were released, and the freeze on the site owner’s personal account was removed. But what if it had been another, lesser-known website or company? Would PayPal have still caved, and as quickly?

PayPal is an excellent choice for businesses that do a small volume of sales on the Internet. However, tales of woe similar to the Regretsy situation have consistently marred its reputation. A review is in order for PayPal, whose representative told the Regretsy site owner she should “refund everything, write a letter saying you understood what you did WAS WRONG AND YOU WILL NEVER DO IT AGAIN, and then request permission to close your account.” (Caps are her emphasis.) Maybe PayPal should spend a little more on its call quality control and personnel.

Where PayPal Goes Wrong

PayPal’s policies on the use of the Donate button are notably vague. This means that Regretsy was not wrong to use the Donate button, since there were no obvious limitations on its use in the PayPal terms of service. In fact, PayPal explicitly stated that it could be used for “worthy causes”. But it does mean that PayPal was within its rights to freeze the money pending a review. What any small business should remember is that PayPal can and will freeze funds for any reason, however arbitrary it may seem to the business in question.

PayPal has to keep the service secure or nobody will use it. I was subject to a freeze when a number of clients all paid invoices at once on PayPal and my account was flagged. A quick call to customer service sorted it out, but the funds were held about seven days longer than usual. More importantly, nobody contacted me to let me know that there was a flag; I had to notice there was a problem and call them.

Avoiding the Chill of PayPal

There is no surefire way to avoid PayPal freezes. A good start, although everyone on the Internet will argue that this shouldn’t be required, is to contact PayPal for help before implementing a new feature on your site, and recognizing that your account may be targeted if you do a higher-than-usual volume of sales.

There are a huge number of options out there for businesses that want to accept money online. For a business that wants to run a similar charitable cause, there’s ChipIn, which does not have any vague restrictions on how it can be used. To accept online payments, Global Payments is one of the market leaders, but there are many more in the space to choose from.

Update: Winchell told me she is considering going with WePay, whose CEO has offered to match her first $5000 in donations. WePay can take payments without a merchant account or website.

Ask around your chamber of commerce or lurk on Internet forums to see which service your fellow business owners prefer to use in your industry.

Remember that PayPal is the leader in this space because of its low fees. You aren’t likely to find cheaper than PayPal, but you will get better service and a more merchant-focused experience with a payment provider in a higher price tier.

The Regretsy situation is regrettable, but doesn’t mean that every small business should abandon PayPal immediately. What it does mean is that when you get to a point that your business is reliant on its online commerce to meet payroll or other important operating expenses, you should secure a merchant account with a larger-scale payment provider to isolate your business from the chilling effects of a potential PayPal freeze.

Angela West dreams of opening a Fallout-themed pub featuring wait staff with Pip-Boys. She's written for big insurance companies, small wildlife control businesses, gourmet food chains, and more. Follow her on Twitter at @angelawest and Facebook.